After my one-day nod to the mania surrounding the Facebook IPO with yesterday’s chart, I feel compelled to return to more serious matters today. The market is in the throes of one of its most oversold periods in a decade, and that catches my attention much more than the IPO of the modern-day yellow pages (if anyone knows how the first PhoneBook IPO of the early 20th century traded, please email me).
Today’s 2 charts focus on the U.S. Treasury market, the largest securities market in the world. In case you don’t follow the price action in the U.S. Treasury market each and every day, you should. It is the biggest market in the world. The biggest. And it’s the first price I check each morning.
TLT (representing 20-30 year Treasury bonds) closed at a new all-time closing high yesterday, which was more significant for me than the 1.5% sell-off in the S&P 500. Here’s the 10-year chart:
As you can see, it only hit these levels during the crisis last year and in 2008. It indicates a serious flight to safety, and concerns me about risk appetite for the balance of the year. But what’s the trade?
Well, I’ve noticed that TLT implied volatility had been relatively subdued until this week, and took a big jump yesterday on the breakout. Here’s the chart of 30 day implied (red) vs. 30 day realized (blue line):
Implied volatility looks expensive to realized at first glance, but it’s actually in the middle of the range of the last 2 years, just high vs. the last few months. Given that it’s at all-time highs, I would be willing to buy TLT straddles (basically, a bet on TLT implied volatility moving higher) if we got a bit of a pull back in implied volatility over the next few days. When the largest market in the world is in uncharted territory, owning options on either a breakout or a failed breakout makes sense to me.
Finally, one last datapoint that stood out to me yesterday in TLT was that calls and puts were almost equally active yesterday. I expected to see far more calls traded given the fast move higher, but that was not the case. You can see the most actively traded options in the following screen, with the volume for the day split between calls (54,759) and puts (48,277) in the upper right:
It makes me think that there will be a day in the not-too-distant future where a large majority of the volume will be calls. I hope I am long options on that day, and if I am, that is when I plan to sell to all the panicked call buyers.